Living trusts are among the most popular estate planning tools. When properly structured and funded, living trusts avoid probate and allow the trust creator (grantor) to specify how assets will be administered and distributed after his or her death.
When it comes to setting up a living trust, choosing an attorney with experience in this area of law is crucial. A living trust can be a powerful tool for estate planning, but it can also be complex and involve a range of legal and financial considerations. An attorney with experience in setting up living trusts can help you navigate the process, avoid potential pitfalls, and ensure that your assets are protected and your wishes are carried out.
What is a living trust?
A living trust, also known as an inter vivos trust or revocable living trust, is a legal arrangement in which a person (the grantor) transfers assets, such as real estate, stocks, and cash, to a trust while they are alive. The trust is managed by a trustee, who can be the grantor or someone else chosen by the grantor. The trustee holds legal title to the assets on behalf of the beneficiaries, who are named by the grantor and can include family members, friends, or charitable organizations.
Although a living trust can be revocable or irrevocable, the term is most commonly used to describe revocable trusts. Revocability allows the grantor to change his or her mind about the trust.
Living trusts have several advantages over other estate planning tools. For example, they allow assets to pass to beneficiaries without going through probate, a court-supervised process that can be time-consuming, expensive, and public. This means that the beneficiaries can receive their inheritance faster and with less hassle. Additionally, living trusts can provide more flexibility and privacy than wills, which are subject to public record.
To create a living trust, the grantor must draft a trust document that specifies the terms of the trust, such as who the beneficiaries are, what assets are included, and how the trust should be managed. The grantor must then transfer legal ownership of the assets to the trust, which can be done by changing the title of the assets to the name of the trust. It is also common for the grantor to name themselves as the initial trustee, giving them continued control over the assets during their lifetime. However, the grantor must also name a successor trustee to take over management of the trust if the grantor becomes incapacitated or dies.
Living trusts are commonly used by individuals who want to protect their assets and provide for their loved ones after they pass away. They are especially popular among those who own real estate or other valuable assets that they want to pass on to their beneficiaries with minimal complications. However, living trusts can also be used for other purposes, such as charitable giving or business succession planning.
What are the benefits of a living trust?
There are several benefits to creating a living trust, which include:
- Avoiding probate. One of the primary benefits of a living trust is that it can help you avoid probate, which is the court-supervised process of settling an estate. Probate can be time-consuming and expensive, and it can also be a public process, which means that your estate and your beneficiaries’ inheritances become a matter of public record. By creating a living trust, you can transfer your assets to the trust, which means that they are no longer considered part of your probate estate. This can help your beneficiaries receive their inheritances faster and with less hassle.
- Providing flexibility and privacy. A living trust can also provide more flexibility and privacy than a will. Unlike a will, which becomes a matter of public record when it is filed with the court, a living trust is a private document that is not filed with the court. This means that the terms of the trust and your beneficiaries’ inheritances can remain private. Additionally, a living trust can be more flexible than a will, as it can provide for the management of your assets in the event that you become incapacitated, as well as after your death.
- Protecting assets. A living trust can also provide protection for your assets. For example, if you are concerned about leaving assets to a beneficiary who may be vulnerable to creditors or who may not be able to manage the assets responsibly, you can use a living trust to provide for the management and protection of those assets.
- Reducing estate taxes. Depending on the size of your estate, a living trust can also be used to reduce or eliminate estate taxes. By transferring assets to a living trust, you may be able to take advantage of estate tax exemptions and reduce the overall value of your estate.
- Ensuring a smooth transition of assets. A living trust can help ensure a smooth transition of assets to your beneficiaries. By providing for the management and distribution of your assets in a clear and organized way, you can help minimize the potential for conflict among your beneficiaries.
Summary: A living trust can provide a range of benefits, including avoiding probate, providing flexibility and privacy, protecting assets, reducing estate taxes, and ensuring a smooth transition of assets. If you are considering creating a living trust, it is important to consult with an experienced estate planning attorney who can help you understand your options and create a plan that meets your unique needs.
What are the potential pitfalls to living trusts?
While a living trust can provide many benefits, there are also potential pitfalls to consider. These include:
- Cost. One potential pitfall of a living trust is the cost of setting it up. Creating a living trust typically involves legal fees, which can be higher than the cost of creating a simple will. Additionally, there may be ongoing fees associated with managing the trust, such as trustee fees, accounting fees, and tax preparation fees.
- Complexity. A living trust can be more complex than a will, and it may require more time and effort to set up and manage. For example, the grantor must transfer ownership of assets to the trust, which may involve changing the title of property, updating beneficiary designations, and transferring ownership of financial accounts. Additionally, the trustee must manage the trust and ensure that its terms are followed, which can be time-consuming and complicated.
- Loss of control. By transferring assets to a living trust, the grantor may lose some degree of control over those assets. For example, if the grantor names a trustee to manage the trust, they must rely on the trustee to make decisions that are in the best interest of the beneficiaries. Additionally, the grantor may not be able to make changes to the trust once it is established, depending on the type of trust created.
- No asset protection. While a living trust can provide protection for assets in some situations, it does not provide asset protection in all cases. For example, if the grantor is sued or faces other legal claims, assets held in a living trust may still be vulnerable to creditors.
- Possible delays in receiving assets. While a living trust can help avoid probate and ensure a smooth transition of assets to beneficiaries, there can still be delays in receiving assets from the trust. For example, if the trustee needs to liquidate assets to pay debts or taxes, it may take time to distribute the remaining assets to beneficiaries.
Need to set up a living trust?
An experienced estate planning attorney can help avoid potential pitfalls. For example, if the trust is not drafted properly, it may not be effective in achieving your estate planning goals. Additionally, if the grantor fails to properly transfer assets to the trust, those assets may still be subject to probate. An experienced attorney can help ensure that the trust is drafted correctly, that assets are properly transferred, and that the trust is set up in a way that achieves your specific goals.
Another potential pitfall to be aware of when setting up a living trust is the risk of fraud or financial exploitation. Unfortunately, there are individuals who may try to take advantage of vulnerable or elderly individuals by promoting living trusts as a way to protect assets. These individuals may not have the proper legal knowledge or experience to properly set up a living trust, and they may charge excessive fees or engage in other unethical practices. By working with an experienced attorney, you can help protect yourself from fraud and ensure that your assets are properly protected.
Working with an experienced attorney can also provide peace of mind. When you set up a living trust, you want to be sure that your assets are protected and that your wishes are carried out. An attorney with experience in this area can help ensure that your trust is structured in a way that achieves your goals, that your assets are properly transferred to the trust, and that your beneficiaries are named and protected.